Why is the market willing to pay a highe…
Why is the market willing to pay a higher multiple for Oracle that it is willing to pay for Research in Motion when Oracle is growing slower than Research in Motion?
Oracle grew its topline 29% year over year in the quarterly report they just issued last night and is today trading at a 14x P/E ratio. Meanwhile, RIMM grew its topline some 36% year over year in the quarterly report they just issued last night and the stock is today trading at a 8x P/E ratio. If you include each company’s respective billions in net cash on the balance sheet, Oracle’s at 12x and RIMM at 7x. Why is the market willing to pay almost twice as much for the earnings power at one company than the other? The answer is straightforward when you think about it – Oracle dominates its industry and is poised to continue to drive its entire industry forward and maintain and/or even take marketshare from its competitors.
Meanwhile, RIMM, as I’ve been pointing out since the stock was above $100, is poised to lose marketshare as the iPhone/Android dominance builds on its critical mass and positive feedback cycles as more apps and developers focus on those platforms, bringing in more customers which bring in more developers and apps. RIMM’s losing mass and its platform, while still a dominant force and likely to always be a player in the industry, has lost its de facto standard corporate mobile email status, and it’s never had critical mass in any other niche.
In my report, 50 Stocks for the App Revolution which we originally published back in November, I gave Oracle a 7/10 Revolution Investing rating and wrote:
The story here is Oracle’s new software/hardware combination of offerings, Exalogic and Exadata, which help corporations, media companies, banks and just about every other thing that will run apps work. And Exalogic and Exadata are catching huge traction, as the incredible leap in efficiency in running any kind of data-crunching intensive information makes these puppies pay themselves within months.
Oracle’s long-been out strategizing its major competitors and the open source world by locking-in customers with proprietary offerings and creating de facto standard platforms with its software, but the brilliance of buying Sun Micro on the cheap with its huge net cash balance was pretty awesome. I just wish they’d stop wasting shareholder value by buying billions of dollars of their own shares and would up the dividend to a 3% plus yield. Not as cheap as it could be right now, at 12x forward earnings, but in ten years I think it’s a pretty good bet that Oracle will be higher than it is today. Revolution Investing rating: 7/10
Meanwhile, in that same report, I gave RIMM a 2/10 Revolution Investing rating and wrote:
Apps and all things related to apps are in a huge growth cycle, and that while RIMM’s rightly been punished for losing market share in the smart phone market, especially in the US, it’s still going to show growth over the next few years — despite continuing to lose smart phone market share along the way. The virtuous cycles that critical mass brings to a tech company, has recently ended for RIMM. RIMM had critical mass for the enterprise email solutions for a decade, but the technology has been creatively destructed by the very similar and more flexible (though still slightly less reliable) email/message/social-networking capabilities of the iPhone and Android…which, as I wrote yesterday, are just starting to see the virtuous cycles that come from critical mass. How do you know when a company’s got critical mass, or for that matter, when they’re starting to get it or when they’re losing it? There’s not set formula, of course. You’ve got to watch the trends, the technologies, the companies, the consumers actions and where the developers are going. Revolution Investing rating: 2/10
Oracle is up more than 20% since I published that 7/10 rating for it and RIMM is down more than 5% since I published that 2/10 rating for it. Stock picking matters, in other words.
